Understanding leadership in complex systems

Understanding Complex Systems

Terje Andreas Tonsberg
Jeffrey Shawn Henderson

Understanding
Leadership
in Complex
Systems
A Praxeological Perspective


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Editorial and Programme Advisory Board
Henry Abarbanel, Institute for Nonlinear Science, University of California, San Diego, USA
Dan Braha, New England Complex Systems Institute and University of Massachusetts Dartmouth, USA
Péter Érdi, Center for Complex Systems Studies, Kalamazoo College, USA and Hungarian Academy
of Sciences, Budapest, Hungary
Karl Friston, Institute of Cognitive Neuroscience, University College London, London, UK
Hermann Haken, Center of Synergetics, University of Stuttgart, Stuttgart, Germany
Viktor Jirsa, Centre National de la Recherche Scientifique (CNRS), Université de la Méditerranée, Marseille,
France
Janusz Kacprzyk, System Research, Polish Academy of Sciences, Warsaw, Poland
Kunihiko Kaneko, Research Center for Complex Systems Biology, The University of Tokyo, Tokyo, Japan
Scott Kelso, Center for Complex Systems and Brain Sciences, Florida Atlantic University, Boca Raton, USA
Markus Kirkilionis, Mathematics Institute and Centre for Complex Systems, University of Warwick,
Coventry, UK
Jürgen Kurths, Nonlinear Dynamics Group, University of Potsdam, Potsdam, Germany
Ronaldo Menezes, Department of Computer Science, Florida Institute of Technology, Melbourne, FL, USA
Andrzej Nowak, Department of Psychology, Warsaw University, Poland
Hassan Qudrat-Ullah, School of Administrative Studies, York University, Toronto, ON, Canada
Peter Schuster, Theoretical Chemistry and Structural Biology, University of Vienna, Vienna, Austria
Frank Schweitzer, System Design, ETH Zurich, Zurich, Switzerland
Didier Sornette, Entrepreneurial Risk, ETH Zurich, Zurich, Switzerland
Stefan Thurner, Section for Science of Complex Systems, Medical University of Vienna, Vienna, Austria

Understanding Complex Systems
Founding Editor: S. Kelso
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Terje Andreas Tonsberg
Jeffrey Shawn Henderson

Understanding Leadership
in Complex Systems
A Praxeological Perspective

13


Terje Andreas Tonsberg
Monarch Business School Switzerland
Zug
Switzerland

Jeffrey Shawn Henderson
Monarch Business School Switzerland
Zug
Switzerland

ISSN  1860-0832
ISSN  1860-0840  (electronic)
Understanding Complex Systems
ISBN 978-3-319-40444-8
ISBN 978-3-319-40445-5  (eBook)
DOI 10.1007/978-3-319-40445-5
Library of Congress Control Number: 2016942032
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Notes to Reader on Conventions and Terms

• Action: By the term “action” human purposeful action is meant, unless otherwise
indicated.
• Whenever the name “Mises” is mentioned, the person referred to is Ludwig von
Mises.
• The term “social facts” are used to mean facts that result from human action,
such as institutions and markets.
• Names of fields of study and sciences such as economics and physics are not
capitalized.
• The term “good” is used to refer to both goods and services as well as anything
a human being considers useful, including ideas, actions and institutions.
• The term “a priori statement” has been used to refer to a proposition or assumption that is accepted a priori.
• The terms “a priori statement” and axiom have been used as synonyms.
• The term “satisfaction” has been used interchangeably with the concept of
removal of felt uneasiness that is used by Mises. It does not just mean p­ leasure
in the conventional hedonistic sense, but anything that a man considers
­desirable according to his values.
• The term entrepreneurship refers to human action from the viewpoint of uncertainty, and is not specific to any particular type of action, such as starting a business
project.
• Squared brackets (like these) signify additions made by the author when quoting

others.
• The terms man and men in the masculine form has been used to refer to both
genders in this document in consistency with the style of Mises.

v


Preface

The attempt of social science to emulate the natural as well as the pure and applied
sciences has had unimpressive results. Indeed, notable physicist Richard Feynman
is on record calling social science “a science which is not a science… they follow
the forms… but they don’t get any laws” (Feynman 1981). One way of dealing
with this situation is to adhere to the same approach in the hope that things will
improve. A different approach is to take a step back and see if there may be a different way by analyzing how natural and social sciences are different. This is the
attempt of the work at hand.
This book proposes that social science differs from the natural sciences in a
fundamental way, namely, by involving the phenomenon of choice. Moreover, it
suggests that a useful means for dealing with this phenomenon is the general theory of human action of Praxeology. This meta-theoretical framework helps us to
understand how a complex social system may work and what the limitations of
empirical research are in contributing to this understanding.
To demonstrate its usage we have chosen the field of leadership. We hope to
provide a meta-theoretical guide and illustrate how various theories related to leadership fit the conceptual framework of Praxeology. We propose that Praxeology
brings a framework forward that captures a very broad range of phenomena and
theories, and brings a novel viewpoint of understanding.
Up to this point Praxeology has been largely restricted in application to Austrian
Economics. This has limited the appeal of Praxeology to other fields of inquiry. The
main premise of the book is that Praxeology is not a theoretical framework solely for
the domain of economics. It is a framework of social science based on a pure theory
of choice, that being Menger’s Subjective Theory of Value. Our goal for the book

builds on the original perspective of Mises that Praxeology provides a generalized
structure which researchers may use in developing applied models and frameworks
for the social sciences. We look forward to other researchers bringing the structure
into new fields of inquiry in an attempt to develop more robust applied models.
Zug, Switzerland

Terje Andreas Tonsberg
Jeffrey Shawn Henderson
vii


Contents

Part I  The Subjective Theory of Value and Praxeology
1

Menger’s Subjective Theory of Value: Choice Under
Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2

Mises’ Praxeology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

3

Mises’ Apriorism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

4

The Universality of Praxeology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

5

Praxeology and Leadership. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

6

Leadership as a Process of Exchange Under Uncertainty. . . . . . . . . . 15

7

Discussion Scope and Outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Part II  The Principles and Methods of Mises’ Praxeology
8

Methodological Apriorism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.1 The Criterion of Mises for Accepting a Statement A Priori. . . . . . 27
8.1.1 The Need for A Priori Statements . . . . . . . . . . . . . . . . . . 28
8.1.2 Establishing A Priori Claims. . . . . . . . . . . . . . . . . . . . . . 28
8.2 Mises’ Two A Priori Principles of Cognition. . . . . . . . . . . . . . . . . 30
8.2.1 The A Priori Praxeological Structure of the Mind. . . . . . 32
8.2.2 The A Priori Power of the Human Senses. . . . . . . . . . . . 34
8.3 The A Priori of Regularity of Events. . . . . . . . . . . . . . . . . . . . . . . 36
8.4 The A Priori of Final Cause In Action. . . . . . . . . . . . . . . . . . . . . . 37

9

Methodological Principles Regarding the Role of Empirical
Data in Praxeology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

9.1 Methodological Subjectivism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
9.1.1 The Subjectivity of Action Situational Facts. . . . . . . . . . 43
9.1.2 Subjectivity and Irregularity. . . . . . . . . . . . . . . . . . . . . . . 45
9.1.3 The Shared Nature of Subjective Action Facts . . . . . . . . 48
ix


Contents

x

9.2
9.3

9.4

Methodological Individualism. . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
9.2.1 The Concept of Methodological Individualism. . . . . . . . 50
9.2.2 The Action Origin of Social Facts. . . . . . . . . . . . . . . . . . 52
Methodological Dualism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
9.3.1 The Methodological Consequences of Irregularity. . . . . 57
9.3.2 Characteristics of Social Science Based on Dualism. . . . 61
9.3.3 Examples of Qualitative Prediction or Laws. . . . . . . . . . 63
The Role of Empirical Testing and Forecasting. . . . . . . . . . . . . . . 65
9.4.1 von Mises’ Rejection of Empirical Research. . . . . . . . . . 66
9.4.2 von Mises Position on Subsidiary Assumptions . . . . . . . 69
9.4.3 Evolving the Role of Empirical Data in Theory
Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

10 The Theory of Human Action, Its A Priori Categories

and Assumptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
10.1 The A Priori Subjective Theory of Value. . . . . . . . . . . . . . . . . . . . 76
10.2 The Prerequisites of Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
10.2.1 The Prerequisite of Dissatisfaction . . . . . . . . . . . . . . . . . 77
10.2.2 The Prerequisite of an Image of a Better
State (Goal Image). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
10.2.3 The Prerequisite of Belief in Non-futility
of Action (Expectation/Hope) . . . . . . . . . . . . . . . . . . . . . 79
10.2.4 The Category of Regularity as a Corollary
of Expectation and Imagination. . . . . . . . . . . . . . . . . . . . 80
10.2.5 The Subjectivity of the Prerequisites of Action. . . . . . . . 80
10.3 Ends and Means. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
10.3.1 Action as Exchange. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
10.3.2Goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
10.3.3 The Subjective Theory of Capital and Production. . . . . . 83
10.3.4 The Role of Capital in Universal Praxeology . . . . . . . . . 84
10.3.5 The Subjective Theory of Wealth. . . . . . . . . . . . . . . . . . . 85
10.3.6 The Subjective Theory of Cost. . . . . . . . . . . . . . . . . . . . . 85
10.3.7 The Subjective Theory of Profit and Loss. . . . . . . . . . . . 86
10.4 Time as a Category of Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
10.4.1 Time Duration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
10.4.2 Time Preference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
10.4.3 Time and Higher Order Goods. . . . . . . . . . . . . . . . . . . . . 88
10.5 Uncertainty and Speculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
10.6 Clarifying the Concept of Purposeful Action and Rational
Behavior. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
10.6.1 Rational Versus Irrational Action. . . . . . . . . . . . . . . . . . . 92
10.6.2 Purposeful Action Versus Unconscious Mental
Processes and Habits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
10.6.3 The A Priori of Cues to Action. . . . . . . . . . . . . . . . . . . . . 95

Contents

xi

11 Methodological Procedures in Praxeology. . . . . . . . . . . . . . . . . . . . . . 99
11.1 The Procedures of von Mises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
11.1.1 A Summary of the Steps of Building Praxeological
Theorems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
11.1.2 The Nature of Praxeological Theorems. . . . . . . . . . . . . . 102
11.1.3 Imaginary Constructions—The Method
of Praxeology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
11.1.4 Imaginary Constructions Employed by von Mises . . . . . 105
11.1.5 Value Freedom in Praxeology . . . . . . . . . . . . . . . . . . . . . 105
11.2 von Mises’ Method of Economics Briefly Described . . . . . . . . . . 109
11.2.1 The Static Method and Entrepreneurship
as Change Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
11.2.2 Employing the Static Method to Understand
the Process of Action Between Entrepreneurship,
the Division of Labor and Consumer Sovereignty. . . . . . 112
11.2.3 The Business Cycle Theory of von Mises; The Use
of Action-Based Definitions and Empirical
Assumptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
11.2.4 Empirical Issues in von Mises’ Economics;
Falsification Based on Assumptions. . . . . . . . . . . . . . . . . 118
12 Distinguishing Features of Praxeology. . . . . . . . . . . . . . . . . . . . . . . . . 121
Part III  Entrepreneurship, Imitation and Innovation
13 Praxeology Versus Social Evolution as A Priori Frameworks . . . . . . 129
14 Entrepreneurship as Evolution of Action. . . . . . . . . . . . . . . . . . . . . . . 133

15 The Ultimate A Priori of Discovery. . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
16 The Logic of Perceived Possibilities—Praxeology
and the Process of Evolutionary Learning. . . . . . . . . . . . . . . . . . . . . . 141
17 Defining Innovation from a Praxeological Perspective. . . . . . . . . . . . 145
18 The “A Priori” Category of Imagination . . . . . . . . . . . . . . . . . . . . . . . 149
19 Some A Priori Aspects of Learning. . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Part IV  The Human Action of Leadership
20 Conceptualizing Leadership. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
20.1 Trait Theories of Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
20.2 Behavioral Leadership Theories. . . . . . . . . . . . . . . . . . . . . . . . . . . 160
20.3 Situational Leadership Theories. . . . . . . . . . . . . . . . . . . . . . . . . . . 161
20.4 Information Processing Perspective on Leadership. . . . . . . . . . . . 162
20.5 Transformational Leadership Theories . . . . . . . . . . . . . . . . . . . . . 162


xii

Contents

21 Conceptualizing Leadership Action Praxeologically. . . . . . . . . . . . . . 167
22 The Follower Purposeful Response. . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
23 The Category of the Response Cue (R Cue). . . . . . . . . . . . . . . . . . . . . 173
24 The Subjective Theory of Value and Following . . . . . . . . . . . . . . . . . . 177
25Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
25.1 Follower Habit and Entrepreneurship . . . . . . . . . . . . . . . . . . . . . . 183
25.2 Coordination of Knowledge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
26 Power as a Category of Leadership Action. . . . . . . . . . . . . . . . . . . . . . 191
26.1 The Subjective Theory of Value and Power. . . . . . . . . . . . . . . . . . 192
26.2 The Subjective Value of Authority. . . . . . . . . . . . . . . . . . . . . . . . . 193
26.3 Power and Habit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

26.4 How Power Is Generated and Consumed. . . . . . . . . . . . . . . . . . . . 196
26.5 Power and the Distribution of Knowledge. . . . . . . . . . . . . . . . . . . 198
27 Meta Leadership. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
27.1 Cooperation and Hierarchy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
Part V  Synthesis
28 The Principles of Praxeology and Its Role as a Method
of Social Science. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .207
29 Evolution and Change in Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
30Leadership. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
Epilogue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241


List of Figures

Figure 1.1The process of human action in Menger’s work
on the STV. Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . 4
Figure 4.1The methodological implications of the subjective theory
of value. Source Tonsberg (2015). . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 4.2The paradigm of Praxeology for understanding human
action under uncertainty. Source Tonsberg (2015). . . . . . . . . . . 11
Figure 6.1 The paradigm of praxeology for understanding leadership
as a process of human action under uncertainty.
Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Figure 8.1 The argument for the reasonability of the axioms
of praxeology—the a priori praxeological structure
of the mind and the principle of sense perception.
Source Tonsberg (2015). Note Map nodes without text
are introduced later due to space limitations. For a complete

map with all nodes see p. 76. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Figure 8.2 The present stage of the argument for the reasonability
of the axioms of praxeology summarized. Source Tonsberg
(2015). Note Map nodes without text are introduced later
due to space limitations. For a complete map with all
nodes see p. 76 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Figure 8.3 The a priori of regularity summarized as part of the
argument that praxeology does not accept unreasonable
axioms. Source Tonsberg (2015). Note Map nodes
without text are introduced later due to space limitations.
For a complete map with all nodes see p. 76 . . . . . . . . . . . . . . . 38
Figure 8.4 The a priori of finality summarized as part of the argument
that praxeology does not accept unreasonable axioms.
Source Tonsberg (2015). Note Map nodes without text
are introduced later due to space limitations. For a complete
map with all nodes see p. 76. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

xiii


xiv

Figure 9.1

Figure 9.2

Figure 9.3
Figure 9.4
Figure 9.5
Figure 9.6

Figure 9.7
Figure 10.1
Figure 10.2
Figure 10.3
Figure 11.1
Figure 11.2
Figure 12.1
Figure 14.1
Figure 14.2
Figure 14.3

List of Figures

Methodological dualism as part of the argument that
praxeology’s apriorism is soft. Source Tonsberg (2015).
Note Map nodes without text are introduced later due
to space limitations. For a complete map with all nodes
see p. 76 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Methodological Subjectivism and individualism as part
of the argument that praxeology’s apriorism is soft.
Source Tonsberg (2015). Note Map nodes without text
are introduced later due to space limitations. For a
complete map with all nodes see p. 76. . . . . . . . . . . . . . . . . . . . 42
The need for methodological dualism. Source
Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Situational interpretation as part of action. Source
Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
The case against monism and the case for dualism.
Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

How the praxeological approach to accepting empirical
data is part of the argument that praxeology’s apriorism
is soft. Source Tonsberg (2015). Note In the argument maps
presented in this book, green boxes signify supporting
reasons to the boxes they are directly linked to above
them in the hierarchy, while red signify counterarguments,
and orange rebuts to counterarguments . . . . . . . . . . . . . . . . . . . 67
Arguments for praxeology as a reasonable aprioristic
approach to human action. Source Tonsberg (2015). . . . . . . . . . 73
The process of idea generation that underlies action.
Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Degree of conscious thinking in decision making.
Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Degree of awareness in terms of the key objects of judgment
or decision making. Source Tonsberg (2015). . . . . . . . . . . . . . . 98
The mechanism by which the entrepreneur serves
the consumer. Source Tonsberg (2015). . . . . . . . . . . . . . . . . . . . 113
The role of entrepreneurship in the pure market economy.
Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
The pyramid of main tools and principles of praxeology.
Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Levels of learning and innovation in action. Source
Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
The evolution of action. Source Tonsberg (2015). . . . . . . . . . . . 135
Replication and innovation in action. Source Tonsberg
(2015). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135


List of Figures

xv

Figure 15.1 The a priori structure of the mind and action. Source
Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
Figure 16.1 The recognition of categories. Source Tonsberg (2015). . . . . . . 142
Figure 16.2 Learning through experience. Source Tonsberg (2015) . . . . . . . 142
Figure 16.3 The relationship between learning and action.
Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Figure 17.1 Action as imitation and innovation. Source Tonsberg (2015). . . 146
Figure 17.2 Innovation comes from novel concepts or novel relations.
Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
Figure 18.1 The imagination input and process postulates of innovation.
Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Figure 20.1 Major factors and theoretical perspectives on leadership.
Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
Figure 21.1 The constituent parts of the basic element of leadership
action. Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . 169
Figure 23.1 An effective R cue. Source Tonsberg (2015) . . . . . . . . . . . . . . . 174
Figure 23.2 The interplay of communication, sensemaking,
and valuation in the follower–leader relationship.
Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
Figure 24.1 The interrelated factors that affect subjective preference.
Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
Figure 25.1 The variables of speculation in human action.
Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
Figure 25.2 The process from R cue to response R/no R. Source
Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
Figure 25.3 The relationship between mental energy expenditure
and entrepreneurship. Source Tonsberg (2015). . . . . . . . . . . . . . 186
Figure 25.4 Scale of information sharing approaches. Source

Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
Figure 26.1 Subjective value of R in light of both its intrinsic value
and the value of obeying L. Source Tonsberg (2015). . . . . . . . . 193
Figure 26.2 Habitual and argument based follower response. Source
Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
Figure 26.3 Leadership power-compliance matrix. Source Henderson
(2016). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
Figure 27.1 Scale of cooperation. Source Tonsberg (2015). . . . . . . . . . . . . . 203
Figure 28.1 The categories of action elucidated by Mises.
Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
Figure 28.2 The framework of human action categories.
Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
Figure 29.1 The praxeological evolutionary conception
of entrepreneurship. Source Tonsberg (2015).
Note This figure is being repeated for illustrative purposes. . . . 212


xvi

List of Figures

Figure 29.2 Concepts and relations as a source of innovation.
Source Tonsberg (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
Figure 30.1 The praxeological evolutionary conception of leader
action and follower response. Source Tonsberg (2015) . . . . . . . 216
Figure 30.2 Leadership as evolutionary exchange between
entrepreneurs. Source Tonsberg (2015). . . . . . . . . . . . . . . . . . . .217


List of Tables

Table 4.1 Google Scholar search results for terms related
to praxeology and leadership theory. . . . . . . . . . . . . . . . . . . . . . . 11
Table 5.1 Google Scholar search results for terms related
to praxeology and leadership theory. . . . . . . . . . . . . . . . . . . . . . . 14
Table 11.1 Major imaginary constructions employed by von Mises . . . . . . . 106
Table 12.1 Theorems of Mises’ economics phrased as Popperian
social laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Table 20.1 Major theoretical perspectives on leadership . . . . . . . . . . . . . . . . 163
Table 21.1 Implied actions of leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
Table 26.1 Ten categories of power. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
Table 29.1 Praxeological approach to 10 behavior change variables. . . . . . . 213

xvii


Part I

The Subjective Theory of Value
and Praxeology

Carl Menger is widely regarded as one of the three inventors of the Subjective
Theory of Value (STV) along with Jevons and Walras (Neck 2014). Nevertheless,
Menger’s view and elaboration of the theory was unique and his work led him to
found the Austrian School of Economics and away from the mainstream
neoclassical approach (Boettke 2010, bk. xi). However, it was Ludwig von Mises
that would elaborate and expand upon the STV in an even farther reaching
manner. He saw the STV as a foundation not only for economics but for a general
theory of purposeful human action, or as he called it: Praxeology. Its aim was to
understand action as a process of choice or exchange1 under uncertainty based on

a research method of a priori theorizing and methodological individualism.2
However, no significant systematic attempts have been made to take Praxeology
beyond the field of economic theory, even by Mises himself.3 Accordingly, our
work represents a methodical effort to fill this gap by transferring this general theory of human action to the field of leadership. By doing this, we also hope to clarify the path for applying Praxeology as a general and integrative framework for the
social sciences. However, first we need to briefly address the questions of what
Menger’s STV is, how Mises refined it to become Praxeology, and how it could
contribute to leadership theory.

1Choice and exchange are the same phenomena under the STV, because personal choice implies
sacrifice of alternative courses of action.
2I.e. based on individual action or choice as a micro foundation for theory.
3As shall be discussed below.


Chapter 1

Menger’s Subjective Theory of Value:
Choice Under Uncertainty

In contrast to classical price theories, the STV proposed that goods have no intrinsic
value whatsoever. More importantly, it unified the notion of value in a single concept. This was that all choices are made based on subjective values associated with
any perceived alternatives
The value an economizing individual attributes to a good is equal to the importance of the
particular satisfaction that depends on his command of the good…. The determining factor
in the value of a good, then, is neither the quantity of labor or other goods necessary for
its production nor the quantity necessary for its reproduction, but rather the magnitude of
importance of those satisfactions with respect to which we are conscious of being dependent on command of the good. This principle of value determination is universally valid,
and no exception to it can be found in human economy. (Menger 2007, pp. 146–147)

Accordingly, Menger argued that the unit of analysis in Economics is man’s

act of choosing or exchange based on subjective preference rankings of alternative
courses of action.
However, Menger also saw another concept as important and inseparable
from the STV. This was the idea of uncertainty and consequent error in human
action. In other words, the STV’s subjective preference rankings were not to be
understood as cardinal and stable scales to which calculus could meaningfully be
applied. Rather, they were to be understood as ordinal and highly transient phenomena shaped by a complex world of lacking information, mistakes, disequilibrium, and uncertainty. As such, it was an original contribution to the marginalist
revolution in economic analysis that was otherwise idealized in mathematical form
(Jaffe 1976).
Indeed, Menger (2007, p. 148) saw error as being “inseparable from all human
knowledge” and, thus, changes in knowledge as fundamental parts of the market
process. On the one hand, there are error prone consumers, continuously correcting their estimates of their own needs, what would satisfy them, and the value of
that satisfaction. On the other hand, there are error prone entrepreneurs seeking
information about the market, performing economic calculations and carrying
© Springer International Publishing Switzerland 2016
T.A. Tonsberg and J.S. Henderson, Understanding Leadership in Complex Systems,
Understanding Complex Systems, DOI 10.1007/978-3-319-40445-5_1

3


4

1  Menger’s Subjective Theory of Value: Choice Under Uncertainty

Fig. 1.1  The process of
human action in Menger’s
work on the STV. Source
Tonsberg (2015)

Subjective
Valuation

Individual
Choice/
Exchange

Uncertainty
and Learning

out business plans accordingly. Correcting error is, henceforth, of fundamental
­importance to social welfare and Menger held that “the degree of economic progress of mankind will still, in future epochs, be commensurate with the degree of
progress of human knowledge ” (Menger 2007, p. 74).
In this manner, Menger laid the basis for a paradigm that focused on the process of human action and learning under uncertainty in the market, rather than
states of competition or equilibrium, as illustrated in Fig. 1.1.
These ideas connected to the STV were further developed by other Austrians
like Schumpeter (1950, pp. 81–86) in his notion of creative destruction, Mises
(1996) in his work on the process of human action in the market and von Hayek
(1937) in his work on knowledge and discovery processes.


Chapter 2

Mises’ Praxeology

Mises saw Menger’s work on the STV1 as revolutionary, because prior to its discovery
economics was restricted to being a theory of wealth, selfishness, and the profit motive
(Mises 1996, pp. 2–3). He was also profoundly influenced by it and became one of
Menger’s most prominent intellectual descendants with students like Friedrich von
Hayek, Israel Kirzner, Alfred Schutz, and Murray Rothbard (Ebenstein 2003, p. 24;

Eberle 2009). However, he also set out to establish greater methodological clarity for

1The STV may seem intuitively obvious once explained and is in principle accepted by all
mainstream economists since it serves as the most fundamental assumption for utility theory.
However, it should be mentioned that there was previously considerable confusion as to which
idea of value would be relevant to economics (Smart 1931, p. 1). For example, in “The Wealth
of Nations” of Smith (2009, pp. 20–21) one finds him defining the value of a good in terms of
the utility (usefulness) of the object, the purchasing power it provides for other goods, or the toil
and trouble it can save or buy. Marx (1959) expanded upon the latter idea and held that a “useful
article… has value only because human labour in the abstract has been embodied or materialised
in it”.
However, the concepts of value as usefulness or purchasing power do not explain, e.g., why
water has little exchange value compared to diamonds (Smith 2009, pp. 20–21). Moreover, a theory based on embodied labour was also found by some to have problems. E.g., Bastiat stated:
“We can give the general name of obstacle to everything that, coming between our wants and our
satisfactions, calls forth our efforts. The interrelations of these four elements—want, obstacle,
effort, satisfaction—are perfectly evident and understandable in the case of man in a state of isolation. Never, never in the world, would it occur to us to say: “It is too bad that Robinson Crusoe
does not encounter more obstacles; for, in that case, he would have more outlets for his efforts;
he would be richer…lt is too bad that the sea has cast up on the shore of the Isle of Despair useful articles, boards, provisions, arms, books: for it deprives Robinson Crusoe of an outlet for his
efforts; he is poorer… It is too bad that Robinson Crusoe has invented nets to catch fish or game;
for it lessens by that much the efforts he exerts for a given result; he is less rich” (Bastiat 2001,
p. 96). These were points well made, but the solution to the problem of defining economic value
in a unified manner was still missing.

© Springer International Publishing Switzerland 2016
T.A. Tonsberg and J.S. Henderson, Understanding Leadership in Complex Systems,
Understanding Complex Systems, DOI 10.1007/978-3-319-40445-5_2

5

6

2  Mises’ Praxeology

the Austrian School (Mises 2002, p. 18).2 That is, to clarify the methodology of
Economics as a study of Human Action, i.e., as a process of exchange under uncertainty. It was this effort that culminated in proposing his Praxeology as a methodology
distinct from the other methods commonly associated with sociology, such as positivism and historicism (Mises 2002, p. lxviii).
Mises’ work on methodology was a reaction to the debate concerning what
would be the appropriate scientific approach of economics. In other words, the
dispute of whether Economics was an empirical science like physics, or merely a
branch of history without the possibility of discovering economic laws (Mises
1984). However, Mises’ contribution of Praxeology was a controversial response,
for it proposed an approach founded on a priori statements regarding purposeful choice; the categories of human action. Mises had come to this because he had
observed that Menger’s theory implied that economics is not fundamentally about
objects behaving with constant regularity, or about the psychological content of
people’s wants or decision making, or even something without regularity altogether.
Rather, it was a science based on ends and means, and their implied meanings;
about thought and its manifestation in action, as had been pointed to by Max Weber
The theory of marginal utility, and every other subjective value theory, are not psychologically, but, if one wants a methodological term, ‘pragmatically’ based, i.e. they involve the
use of the categories ‘ends’ and ‘means.’ (Lachmann 1976)3

Accordingly, Praxeology was founded on the implication of ends and means,
namely, conscious action involving a chosen purpose, as opposed to sleep walking
or action that is purely reflexive, such as a knee jerk. However, to Mises this was
more than merely a good place to start one’s analysis. Rather, it was an a priori
category or axiom in the sense that it is “a self-evident truth… the cognition of the
fact that there is such a thing as consciously aiming at ends” (Mises 1962, pp. 6–7).

2Economics of course is only a part of Praxeology and its scope of study is mainly “the analysis
of the determination of money prices of goods and services exchanged on the market” (Mises

1996, p. 234).
3Translation by Lachmann (1976) of Max Weber’s 1909 essay, “Die Grenznutzlehre und das
­psychophysis-che Grundgesetz”.


Chapter 3

Mises’ Apriorism

Hence, the most fundamental and most distinguishing idea in Mises’ clarification
of the methodology of economics is the elucidation of its a priori foundation. He
proposed that theoretical reasoning in Praxeology starts not at an arbitrary point
but with self-evident axioms regarding the nature of choosing as understood
through the STV (Mises 1962, pp. 4–5). In other words, the subjective theory
of value leads to the deduction of several a priori categories and based on these
one deduces theorems. Any praxeological theory must recognize these categories
because they are known aspects of all purposeful human action. Mises summarized this system of a priori concepts as follows:
The very category or concept of action comprehends the concepts of means and ends, of
preferring and putting aside, viz., of valuing, of success and failure, of profit and loss, of
costs. As no action could be devised and ventured upon without definite ideas about the
relation of cause and effect, teleology presupposes causality…. We cannot think of an acting being that would not in concreto distinguish what is end and what is means, what is
success and what is failure, what he likes more and what he likes less, what is his profit or
his loss derived from the action and what his costs are… (Mises 1962, pp. 8–9)

Very importantly, Mises pointed out that uncertainty is not merely an assumption of the STV. Rather, it is a category of action, because if one knew the future,
one “would not have to choose and would not act,” but merely react without will
(Mises 1996, p. 105). In this way, Mises made Menger’s emphasis on human error
inseparable from the STV, because it is implied in choosing based on preference.
Accordingly, from the starting point of a priori propositions Praxeology is a
way “to trace back all theorems to their unquestionable and certain ultimate basis,

the category of human action, and to test by the most careful scrutiny all assumptions and inferences leading from this basis to the theorem under examination”
(Mises 1996, p. 68). For example, whenever a person chooses one thing over
another, he foregoes the other, and that which is foregone represents the psychic
opportunity cost of the choice of action; a form of exchange. Accordingly, psychic
profit or loss becomes the difference between what was foregone and what was
© Springer International Publishing Switzerland 2016
T.A. Tonsberg and J.S. Henderson, Understanding Leadership in Complex Systems,
Understanding Complex Systems, DOI 10.1007/978-3-319-40445-5_3

7


8

3  Mises’ Apriorism

actually gained. On the other hand, the means an actor possesses for reducing felt
uneasiness becomes his capital (Mises 1996, p. 636, 2007, p. 210). In this way, the
fundamental concepts employed in economics, such as cost, profit and loss, are
derivable from the category of action, the notion that men employ means to reduce
psychic felt uneasiness, via the STV. Moreover, theorems such as the law of marginal utility1 is derived from the category of action, as it is simply “the reverse of
the statement that what satisfies more is preferred to what gives smaller satisfaction” (Mises 1996, p. 124); i.e., it comes from the a priori of preference implied in
action and is as such explained by the STV.
However, although Praxeology is based on meanings implied by action, it is
not psychology in the sense of being concerned with causal explanations of personal value systems or psychological forces. For example, it is not concerned with
why a particular person likes business profit more than family life, or vice versa.
Rather, it begins where psychological studies leave off, namely at “the psychic
events that result in action” (Mises 2002, P. 3). As such, it is both a tool for building theorems that offer interpretation of historical events and for forming expectations about effects of particular kinds of action (Mises 2007, p. 309). An example
of a praxeological theorem would be that price fixing at lower than market price
for good A will lead to shortages and queuing, because at the lower price more

people will choose to acquire the good A than what is available. This proposition serves to predict what price fixing will lead to in the future, but also explains
what happened historically when there is price fixing, such as in the former Soviet
Union.

1The law of marginal utility holds that the value of a unit of a particular good depends on the
incremental (marginal) impairment of well-being its loss would cause. This is according to the
belief of the actor in a particular situation in time and space. I.e. it does not depend on the value
of the entire class of that good, but the marginal employment and utility of that good, everything
else equal. This is why gold is more expensive than water; as units are added of a good, each
subsequent unit is allocated for a less urgent employment (Mises 1996, pp. 119–127). E.g. at a
certain level of water scarcity and thirst a person may be willing to pay more for a glass of water
than a handful of gold, but if there is plenty of water and no thirst this will not normally be the
case.


Chapter 4

The Universality of Praxeology

According to the above, the STV forms a qualitative, a priori meta-theory of purposeful human action based on its implied categories of means and ends, preference, and so on. However, it also stresses the individual and subjective nature of
choice. Hence, the STV implies three major methodological components as illustrated in Fig. 4.1.
In this way, Praxeology forms an overarching framework similar to the evolutionary approach in biology or atomism in chemistry under which more detailed
theories can be organized. The purpose of the framework is to study human action
under uncertainty, as illustrated in Fig. 4.2.
Indeed, Mises’ Praxeology made Austrian Economics achieve in the words
of Lachmann (1976) “a level of methodological self-awareness it had never previously enjoyed”. However, it also showed that the STV had made economics a
part of the study of purposeful human action in general, united by the factor of
choice. After all, value judgments are made not only for tangible goods, but all
that humans strive for. Mises (1996, p. 3) explains
The modern theory of value widens the scientific horizon and enlarges the field of economic studies. Out of the political economy of the classical school emerges the general

theory of human action, Praxeology. The economic or catallactic1 problems are embedded
in a more general science, and can no longer be severed from this connection. No treatment of economic problems proper can avoid starting from acts of choice; economics
becomes a part, although the hitherto best elaborated part, of a more universal science,
Praxeology.

Hence, when Mises speaks of economics, he is really speaking of Praxeology
in the special case where monetary calculation is involved (Mises 1996, p. 234).
He is not suggesting “economic imperialism”, but rather the contrary, namely, that

1This

is the term for economics used by Mises.

© Springer International Publishing Switzerland 2016
T.A. Tonsberg and J.S. Henderson, Understanding Leadership in Complex Systems,
Understanding Complex Systems, DOI 10.1007/978-3-319-40445-5_4

9


4  The Universality of Praxeology

10

A Priori
Categories of
Action

Subjective
Theory of

Value

Individualism

Subjectivism

Fig. 4.1  The methodological implications of the subjective theory of value. Source Tonsberg
(2015)

economics subjugates to Praxeology. That is, “a general theory of all choices made
by acting men, a general theory of every kind of human action” (Mises 1990c, p. 42).
Accordingly, Praxeology was proposed to provide a more systematic and sound
approach to the study of action and social phenomena than that commonly pursued (von Hayek 1942; Mises 1996, p. 185; Schuetz 1943). Given the unabating interest in Austrian Economics and Mises, as illustrated in the bibliometric
results in the table below, one would expect there to have been many attempts at
bringing Misesian Praxeology to several fields of research other than Economics
(Table 4.1).
Yet, in spite of the impact of Mises’ ideas in economics and political philosophy, his methodology has not been adopted explicitly to a notable degree in any
other field of social science. For example, he appears to be relatively unknown to
sociologists, as he is neither mentioned in the Cambridge Dictionary of Sociology
under action theory, nor in Talcott Parsons’ work on continental-based action
theory, nor in the action theory oriented “Handbook of Analytical Sociology”
(Hedstrom and Bearman 2009a; Macy 2006; Parsons 1949).
There are many possible explanations for this lack of application in other
fields than Mises’ own specialty of economics (Rothbard 1976). One is the widespread perception of Mises as a dogmatic, uncompromising and somewhat idiosyncratic classical liberal. This was to the extent of allegedly having called the
likes of Friedrich von Hayek, Frank Knight, Henry Hazlitt, Milton Friedman, and